Megadeals make a comeback
A flood of billion-dollar deals has boosted Australian M&A activity in the first half of this year. Felicity Nelson reports
After cost-cutting their way through the GFC, companies are looking to M&A as a way to fast-track growth and stay competitive.
The first half of 2015 has seen big deals bounce back, with 31 transactions of more than US$10 billion announced worldwide.
Global M&A transactions totalled US$2.28 trillion in the first half of the year, according to Dealogic. This is one of the strongest M&A records over a six-month period since 2007.
Australia has seen domestic and inbound deals increase 9.5 per cent compared to the first six months of last year, the best start since 2011, with total transactions in the country totalling US$72.4 billion in the first half of 2015, according to Thomson Reuters.
Shareholders have a greater appetite for bold strategic moves, which has been reflected in an increase in megadeals.
Japan Post (advised by Clayton Utz) recently made an US$8 billion acquisition of Australian logistics giant Toll Group (advised by Herbert Smith Freehills), setting the tone for the rest of the year.
Other key deals include the demerger of BHP Billiton’s South 32, the sale of GE Capital’s financial services arm and the purchase of an aircraft operating lease portfolio by Macquarie Group.
Foreign investment in Australia has dropped 28.5 per cent compared to last year. Inbound transactions totalled US$25.3 billion in the first half of 2014, but only US$18.1 billion in the first half of 2015, according to Thomson Reuters.
Outbound investment, on the other hand, increased by 35 per cent in the first half of 2015.
Allen & Overy’s M&A Insights report found that cross-border activity was driven by Japanese investors, but that Indonesia and India will drive M&A activity within the region in the longer term. Australia has been slower than overseas markets to experience an upturn in M&A activity, according to Minter Ellison partner Ron Forster.
“Business has been a bit more cautious in Australia,” Mr Forster says. “But over the past six months or so we have started to see an increase in number of large M&A deals. Australia is seen as a relatively secure country to invest.”
Eye of the storm
Projections by Baker & McKenzie and Oxford Economics predict global transactions will rise by 17 per cent in 2015.
However, growth is expected to ease off after 2017-18, with a rise in interest rates and the end of easy credit leading to a moderate slowdown in global deal-making activity from 2018 through to 2020.
Mr Forster attributes the recent increase in transactions to a feeling that this was a brief window of economic opportunity.
“Perhaps intending bidders are running out of reasons to delay their acquisition plans any further, because the market is not going to necessarily get dramatically any better in the medium term,” he says.
M&A is booming globally for now, but with China’s stock market meltdown and Greece threatening to break out of the eurozone, economic troubles are still hovering on the horizon.
Australia may have survived the GFC with all but a few scratches, but the financial fallout in some parts of the world is still generating uncertainty in the market.
Mr Forster says the recent turmoil in Greece, which saw the country default on its loans and call a referendum on austerity measures, was “causing jitters in the market”.
However, in his view, the crisis was unlikely to slow the Australian market down. As the dollar declines, Australia is becoming more attractive to foreign acquirers.
“In fact, I think it could create opportunities,” Mr Forster adds.
Tom Story, a partner in Allens’ Sydney office and co-head of the firm’s private equity practice, says the situation in China was a more pressing concern for Australia than the eurozone crisis.
“The eurozone issues are not all that significant because they are not new issues,” Mr Story says. “The one area of uncertainty is the Chinese economy and, in particular, instability in the Chinese stock market at the moment. China is the one hesitation in terms of a strong pipeline for M&A.”
Herbert Smith Freehills partner Rebecca Maslen-Stannage says it is almost impossible to make reliable long-term forecasts in M&A.
“It is a very difficult market to predict because there are so many factors that play into it – I wouldn’t dare predict out more than six months,” Ms Maslen-Stannage says.
“There’s the availability of debt, the exchange rates, and it is so challenging to predict what confidence levels will be.”
The last time M&A activity peaked was in 2006, right before the global financial crisis in 2007-08, according to Ms Maslen-Stannage.
“[But] it doesn’t feel like 2006,” she says. “The market is strong but doesn’t feel overheated […] I don’t see how the fundamentals would fall away in a year or two’s time.”
M&A for all seasons
In Mr Forster’s experience, sectors in a cyclical low tend to restructure through M&A, while booming sectors make bold transactions.
Oil, gas and mining companies are currently in the process of restructuring, while industries that are “very much in vogue at the moment”, such as technology and telecommunications, are electing to grow through M&A, he says.
Oliver Talbot, a partner at Brisbane boutique Talbot Sayer, says the “fallen angels”, such as energy and resources companies, are also seeing some interest from private equity.
Ms Maslen-Stannage also points to the infrastructure space as a strong area for M&A, while Mr Story named agribusiness, real estate and healthcare as sectors to watch.
M&A without the price tag
National firms such as Minter Ellison do well in cross-border M&A because overseas acquirers want firms that have a high representation in the local market, Mr Forster believes.
On the other hand, Mr Story says Allens’ international presence, through its relationship with British firm Linklaters, has allowed it to throw a wider net and reach more potential clients. However, it is Mr Story’s close relationship with investment bankers in Australia that has helped him hunt down the best deals.
“Investment bankers are so often putting these deals together and they are sometimes in a position to advise their client on which lawyers to use,” he says.
Ms Maslen-Stannage says M&A is a “flagship” area for HSF and that clients feel confident engaging her firm because the team usually has experience with similar deals: “You kind of get on this roll where clients tend to want the team that did the last deal to do equivalent deals for them.”
While the domestic firms and the international firms battle it out in the M&A space, a new player in the market is making gains.
Two-partner firm Talbot Sayer, launched in April 2014, claims to have “struck a niche” by advising on lower-end M&A, private equity transactions and IPOs at a competitive price, according to partner Oliver Talbot.
“[Clients] don’t want a million-dollar legal fee on a $5 million or $10 million deal,” Mr Talbot says.
Talbot Sayer targets deals such as private equity “bolt ons”, where clients need assurance that the transaction will be done properly but are looking to avoid a big fee.
Lawyers Weekly – 26 August 2015